And the Fed has spoken

This week was one of the biggest and most anticipated economic events of the past two years! The Federal Reserve (the Fed) has started their rate cutting cycle. There is a great deal of misinformed information floating around about what this means and the implications for the housing and interest rate markets. Let’s break down what was expected to occur, what did occur, and what that means for the future.

On Aug. 2, the July Bureau of Labor Statistics (BLS) Jobs report came out for July 2024. The report confirmed the worsening employment picture and sealed the virtual certainty of a Fed rate cut at their September meeting. The big question that the market had been asking was whether that cut would be a 0.25% or 0.5% cut. On Monday of this week, Nick Timiraos, of the Wall Street Journal, put out an article strongly indicating the likelihood of a 0.50% cut. Nick Timiraos has become known as the “Fed mole,” as it is likely that the Fed has given him advance notice of major decisions to help calm markets and not create market panic. This is a common practice for many Fed boards to have a member of the press to provide advance notice to of major decisions. As a result of the expectation of the Fed cut, mortgage rates have seen a steady decline to the lowest levels in well over a year. It is important to note that it was the expectation of the cut and poor economic reports that led to the reduction in mortgage rates.

On Wednesday, the Fed officially cut their target rate by 0.50%, as expected. So what happened: mortgage rates got slightly worse. They ended the week about flat when compared to the past two to three weeks. Clients have been calling in the last several days asking if mortgage rates are now 0.5% better. It is very important to understand that the rate that the Fed actually cut is not a mortgage rate; it is something called the Fed Funds Rate. This is the rate that banks charge each other for borrowing money overnight or for very short periods of time. This rate doesn’t directly influence mortgage rates. What it does do is stimulate the economic growth of the economy by making money cheaper to borrow for banks. Then, banks can make their rates cheaper for other borrowers. It does eventually “trickle down” to mortgage rates.  

As we have discussed in previous posts, mortgage rates are set by the supply and demand of mortgage-backed securities (MBSs). Like the stock market, this market changes based on expectations. Did you ever wonder why you hear that Apple had an amazing quarterly financial release but their stock price went down? It is because the market was likely expecting an even more amazing result. If the market gets what it expects, things don’t change. It’s the same situation with the Fed rate cut. The market was expecting a 0.50% cut, and that is what they got, so nothing changed. When the expectation occurred that the rates were going to be cut after the Jobs report in August, the rates got much better. It was the expectation that set the rate, not the actual cut.

What does this mean going forward? The rate cut was the small news at this Fed meeting. The big news was the report that was released called the Summary of Economic Projections (SEP). The SEP, also known as the dot plot, shows where Fed members see things in the future. This report clearly showed that when compared to the last SEP released in June 2024, that GDP was expected to go down, the unemployment rate was going to go up, and inflation would continue to moderate (lessen slowly). This is all negative news for the economy and good news for mortgage rates. The SEP also showed that a median number of Fed members see a further 0.50-0.75% in cuts this year and 1.00% to 1.25% in cuts next year. This indicates a continuation of cuts over a long period in an attempt to stave off a recession. Rates will be lowering in the future but it won’t be an overnight change.  

With lower rates, we will see more buyers being able to buy due to increased affordability. Builders will be able to borrow at a cheaper rate, making home building easier and hopefully lessening the lack of supply. Speaking of supply, now many homeowners who have been reluctant to sell their homes due to their super-low rates in the 2s and 3s may start to sell them. This is the beginning of a good period for housing and the mortgage markets.

Looking Ahead:

Next week, we will get the Fed’s favorite inflation gauge, the Personal Consumption Expenditures (PCE) report.

• Tuesday: Case Shiller Home Price Index, FHFA House Price Index
• Wednesday: Mortgage Applications, New Home Sales
• Thursday: Final adjustment for Q2 GDP, Pending Home Sales
• Friday: PCE

Now that the Fed meeting is behind us, the markets will turn to devouring all the economic reports coming out to try to predict the Fed’s next move.